Making a Smooth Transition to Retirement
Wondering about the best way to ease into your retirement years? A transition-to-retirement strategy may be the answer, but it’s important to know that the rules have recently changed. Here’s the lowdown.
These days, there are all sorts of pathways to retirement. As more Australians choose to wind down gradually from their careers, it’s becoming increasingly common to move to part-time hours before leaving the workforce altogether. Other pre‑retirees prefer to use their last few years of earning a regular income as an opportunity to give their retirement nest egg a final boost.
Since 2005, Australians who have reached their ‘preservation age’ (currently age 56 or more) have been using transition-to-retirement (TTR) strategies to take advantage of tax savings when they start accessing their super. But with changes to super rules from 1 July 2017, are TTR strategies still as rewarding as before?
How does a TTR strategy work?
In a nutshell, a TTR strategy involves drawing a transition to retirement pension from your super while you’re still working. To set it up, you transfer part or all of your super into a pension account. Then, you have to withdraw between 4% and 10% of the balance each financial year.
When can I start one?
While you’re still working, you can start drawing a TTR pension from your super as soon as you’ve reached your ‘preservation age’. This could be anywhere from 55 to 60 years old, depending on your date of birth. Check the Australian Taxation Office (ATO) website for details.
But remember, if you’ve already fully retired after satisfying a condition of release or have turned 65, then you don’t need to set up a TTR pension to access your super. You can simply take out a lump sum or begin drawing a regular income stream from your super to fund your retirement.
What are the benefits?
Starting a TTR pension means you can work fewer hours but still have the same amount of money coming in, with your pension payments supplementing your reduced income.
Alternatively, you can keep working full time while salary sacrificing part of your pre-tax earnings into super. Again in this case, your TTR pension helps make up the shortfall in your take-home pay.
This was once a particularly tax-effective strategy, but new rules around the tax treatment of TTR pensions have made this a less attractive option for many pre-retirees.
Until 30 June 2017, all investment earnings on super assets supporting TTR pensions were tax-free – but this is no longer the case. Legislation was passed in late 2016 to remove the tax-exempt status of TTR pensions, with this rule coming into effect on 1 July 2017.
From that time, investment earnings on TTR pensions (including those commenced prior to 1 July 2017) are taxed at up to 15% – the same tax treatment that applies to your super while in the accumulation phase.1
This change means that TTR strategies are now generally less beneficial, although they can still be worthwhile in many situations, depending on your circumstances.
Importantly, there are no changes to the tax treatment of TTR pension payments you receive. If you’re aged 60 or over, your payments are tax free. If you’re between your preservation age and 59, then the taxable component of your pension payments will be taxed at your marginal tax rate. On a positive note, you’re eligible for a 15% offset to reduce the tax you pay on this component.
Is a TTR strategy right for me?
If you already have a TTR strategy underway, or you’re thinking of starting one soon, check with us to see if it’s still the best option for you. And since a TTR strategy may involve chipping away at your retirement savings, we can help work out how much you can draw down so you’ll still have enough super to last the rest of your life.
1 Once you reach age 65, or notify your super fund that you’ve met another eligible condition of release (retirement, terminal medical condition, permanent incapacity), your TTR pension becomes a retirement phase income stream and earnings on assets supporting your pension become tax free.
Don’t discount the possibility that North Korea could provoke a very serious war with the US
In my view there is now a real possibility that North Korea & the USA could go to war despite the clear signals from South Korea, Japan, China and many in the US and elsewhere that war should be avoided at all costs because of the likely catastrophic consequences for potentially millions of people and not just in North Korea. Donald Trump’s recent speech to the United Nations indicated a personal resolve to deal with this problem, though he does often speak loudly but not follow through.
Malcolm Chalmers from Royal United Services Institute for Defence and Security Studies says:
“With North Korea making rapid progress in its missile and nuclear programmes, time is not on diplomacy’s side. US President Donald Trump and his senior officials have said that America will not tolerate a North Korean ICBM threat to its territory and citizens, and that ‘classical deterrence theory’ is not applicable. The president has told the UN that ‘Rocket Man [Kim Jong-un] is on a suicide mission for himself and for his regime”’.
He says that “There are no easy military options that can destroy North Korean nuclear capabilities without starting a wider war. By repeatedly emphasising the massive consequences of preventive strikes against North Korea’s nuclear programme, senior Pentagon leaders are therefore sending a clear message to Trump, and to the American people: if you do decide to go ahead with this, do not say we did not warn you. If this war is launched, it will not be surgical or short.
“Yet the Trump administration has so far given little indication that it is prepared to accept such a situation. If it is not, it faces a period of, at most, only two or three years – and perhaps much less, given the rapidity of North Korean technical progress – before it reaches a point at which military action can no longer be taken without unacceptable risk of nuclear retaliation against its own territory. Given this stark choice, there is a real possibility that Trump, with the support of some of his most senior advisers, will decide to resolve the North Korea issue sooner rather than later”.
Investment markets seem to be largely discounting the possibility of a war. I think there is good reason for caution as, aside from Gold, Government bonds and possibly oil, it is hard to believe that a war on the Korean peninsula and potentially beyond would not result in a significant downturn in the currently buoyant sentiment in share markets worldwide.
Is Australian Business Over Regulated?
There is no doubt that regulation is necessary to protect consumers and to ensure that markets run efficiently and that businesses treat customers, staff and suppliers fairly. However, regulation comes at a cost, both in time and money. An interesting example of the growing scope of regulation in Australia is a small financial advice firm like Ramsay Financial Group.
Adviser Ratings reports that in the near future one piece of personal financial advice we provide to clients like you will be regulated by seven regulators, according to the Financial Planning Association (FPA). The FPA has used its submission to the Productivity Commission (PC) inquiry into competition in the Australian financial system to point out that seven regulators – the Australian Securities and Investments Commission (ASIC), the Tax Practitioners Board (TPB), AUSTRAC, Information Officer (Privacy), the Australian Prudential Regulation Authority (APRA), the Australian Taxation Office (ATO), and the new Financial Adviser Standards and Ethics Authority (FASEA) – were all administering Acts and regulatory requirements using different language and imposing different compliance requirements on financial planners. So if you sometimes think that there’s too much paperwork involved in dealing with us, this might help to explain why.
Seems like overkill to me!
This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.